The challenge of catching elusive taxpayers

Context: India’s tax collection is set to decline sharply this year because of the decline in national income and fall in employment due to COVID-19.

Details:

• Expenditures related to the pandemic are ballooning. Thus, the fiscal deficit in the budget is set to rise unless other expenditures are cut.
• However, there are committed expenditures, which cannot be curtailed and the deficit in the budget is set to climb to a new high for 2020-21.

Drop in number of taxpayers

• The number of tax filers has increased but the number of taxpayers has dropped. This is a result of the tax concession offered in the Budget — those filing a return up to ₹5 lakh do not have to pay a tax. Interestingly, in 2012-13, a year for which the government had released detailed data in 2016, the number of effective taxpayers was 16 million.
• Therefore, in spite of an increase in population and the laws introduced in the last six years to bring the rich into the tax net, there has been little change in the number of taxpayers. The fact that the direct tax to GDP ratio in percentage terms is stagnating at about 5.5% is another indication of this.

Facts:

• A 2016 report says the top 10% of Indians earned 55% of the nation’s incomes. If these people could be brought under the income tax net and they paid their taxes honestly, at current tax rates, income tax to GDP ratio alone would have been about 18%.
• Add to that the collection from other direct taxes, like corporate tax, and the figure would be more than 20%. This figure of 55% does not take into account the black income generation in the country
• Clearly, a lot of taxes are not paid out of white incomes and none from the black incomes.

Various measures taken:

• A considerable part of the tax filing process was computerised when e-filing and, earlier, PAN was introduced. These measures tried to cajole people into filing honest returns.
• Former Finance Minister Yashwant Sinha introduced the scheme of honouring honest tax payers. The government is again talking of it.
• The Vivad se Vishwas scheme was introduced to settle tax disputes.
• However, none of these schemes seem to have delivered.

A new system

• The government is able to trust neither the tax department officials nor the rich. Therefore, it has decided to hand over the process of taxation to computers. The computer will decide who will assess the tax return of an individual. During the different stages of a case, different officers will be involved. That is why the new scheme is said to be faceless and anonymous so that no nexus can be formed between the taxpayer and the officer involved in passing the return, and money cannot be paid to evade taxes.

Reference: https://www.thehindu.com/opinion/op-ed/the-challenge-of-catching-elusive-taxpayers/article32431928.ece